Elizabeth Holmes And Theranos Charged With 'Massive Fraud' By SEC

Elizabeth Holmes at the Forbes Under 30 Summit in Philadelphia in 2015.

Theranos, its CEO and founder Elizabeth Holmes and its former president Ramesh “Sunny” Balwani were charged with "massive fraud" by the Securities & Exchange Commission Wednesday.

Holmes, 34, and Balwani, 52, raised over $700 million for their blood-testing company between 2013 and 2015 under false pretenses, the complaint filed by the SEC alleges. They made it appear that Theranos had developed a successful blood-testing device that could be used to conduct a range laboratory tests with just a few drops of blood. The SEC alleges that they deceived investors not only about the capabilities of their product, but also about their relationships with the Department of Defense, its regulatory status with the Food & Drug Administration and other commercial relationships.

The SEC alleges that Holmes touted her blood test's capabilities to investors (and the media) as a "faster, cheaper and more accurate" alternative to tests already on the market. It added that Theranos had only performed 12 of more than 200 tests on its own equipment and used third-party analyzers to do the remaining tests. The SEC also alleges that Holmes and Balwani claimed that their products were used by the Department of Defense on the battlefield in Afghanistan. This did not happen.

Holmes also allegedly told investors that Theranos would generate over $100 million in revenue in 2014 and was on track to generate $1 billion by 2015, when according to the the SEC's complaint, the company pulled in just $100,000 in revenue in 2014. In binders provided to investors, Theranos allegedly included a number of logos of well-known pharmaceutical companies on documents to make it appear as if those companies were endorsing Theranos.

Holmes and Theranos have agreed to resolve the charges filed against them, according to the SEC. Holmes and Theranos, according to a statement provided by Theranos, fully cooperated with the SEC's investigation. Holmes will pay $500,000 fine and is barred from serving as an officer or director of a publicly-traded company for the next decade. Holmes is also required to return 18.9 million shares of Theranos she obtained during the alleged fraud and give up her super-voting equity rights. Neither Theranos nor Holmes denied or admitted any wrongdoing. However, according to the SEC, the settlements with Theranos and Holmes are subject to court approval.

A spokeswoman for Theranos also provided a statement to Forbes from its independent directors, “The Company is pleased to be bringing this matter to a close and looks forward to advancing its technology.”

Elizabeth Holmes first appeared on The Forbes 400 list of America’s richest people in late 2014 with an estimated net worth of $4.5 billion, based on her 50% stake in Theranos, which was valued by investors at $9 billion. Forbes lowered Holmes' net worth to zero in June 2016 after the blood diagnostics company was hit with allegations that its tests were inaccurate and that it was being investigated by several federal agencies.

“The Theranos story is an important lesson for Silicon Valley,” Jina Choi, director of the SEC’s San Francisco Regional Office, said in a statement. “Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”

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